Eight years after the collapse of Lehman Brothers' triggered the global financial collapse, fund managers reveal the biggest lessons learned and those which remain on the horizon and are continuing to threaten the asset management industry.
Dave Fishwick, head of the multi-asset team, M&G Investments
The changing attitudes to systemic risks
There are three main areas where the financial crisis has brought change: the investment environment, the psychology of investors, and in attitudes to systemic risks.
In terms of the investment environment, the crisis served to intensify a regime shift that was already in place and in doing so has significantly shaken up players in the investment industry.
Even prior to the crisis there had been a secular decline in inflation and interest rates, but the effects of 2008 have pushed this to extremes. Added to this has been a situation in which central bankers have responded to periodic growth weakness with monetary policy easing.
The result has been a world in which bonds and bond-like assets have delivered what we would traditionally have considered to be equity-style returns, and on top of that have performed best when many investors have been most in need of insurance.
Tail-risk
Meanwhile, the main impact of the financial collapse of 2008 on investor psychology was not a lesson but a reminder. For investors, clients, and regulators it brought home the concept of 'tail risk'.
This is nothing new, but the weight that we attach to such unexpected events waxes and wanes with recent experience. We move between phases of calm to periods in which 'the next crash' is around every corner. Since 2008 we have certainly spent more time in the latter mindset.
Across the industry, investor time horizons have shortened and willingness to tolerate volatility has declined. Many investors today seem far more focused on managing short term volatility and especially drawdown. For many, this is how risk is defined, sometimes even at the expense of the ultimate long term goal.
We have therefore seen the industry respond with a growth in the range of funds with implicit or explicit drawdown or volatility guarantees. To date, these funds have benefited from an environment in which government bonds and large-cap equities have performed strongly.
The financial crisis and its aftermath brought home the systemic risks associated with leverage. Leverage has the impact of amplifying and spreading the impact of what would otherwise be contained events. This is closely related to investor conceptions of tail risk noted above.
Since the financial crisis, banks have cleaned up their balance sheets. Leverage in itself is not a bad thing, but it is vital that any downside is borne by those taking the risk and not society at large.
